“This is basically a $200 million stamp duty for offshore buyers, and stamp duties discourage investment.”

Parties who breach the government’s proposed new rules could face a range of penalties, including fines of up $85,000 and two years’ imprisonment.

“We don’t believe the penalties will have much impact, because we don’t see any firm evidence of foreign buyers abusing the rules,” Mr Henry said.

“What the penalties really do is set a tone and say to foreign buyers that Australia doesn’t like them very much, even though they are key to new residential construction and the resulting jobs, taxes, agent commissions and new housing supply."

The government also wants to introduce fees on applications for residential real estate.

The proposed fees would be $5,000 for properties valued at less than $1 million and $10,000 for properties between $1 million and $2 million, with fees then rising in $10,000 increments for every $1 million extra of value.

Mr Henry said although the fees aren’t high, the government is wrong to want to charge them every time a buyer applies for permission to buy a property.

“You may bid for five, 10, even 15 properties and lose out to other buyers every time, but you’ll still pay a fee on every one. That is not fair and it discourages foreign buyers and sends them to other shores,” he said.

However, she warned that the fees might make Australia less attractive to foreign investors.

The UK, the US and Canada don’t have application fees, while Switzerland and Austria have lower fees than those proposed by the government, Ms Lynch said.

“In setting the fee level for Australia, REIA encourages the government to consider the equivalent global rates and not discourage foreign investment that has been proven to increase the supply of new housing at a time of a severe shortage,” she said.